How to calculate Capital Contributions to an LLC?

Question

Hi all,

How would you record the "Capital Contributions" to an LLC in the ledger section for the following scenarios:

Scenario 1: Let's say the equity in the property is $60K and mortgage is $140K before the transfer. I deed the property into the LLC and don't change anything else. Would the Capital Contributions just be $60K?

Scenario 2: [Assume the numbers are the same as above] What if the LLC has myself and another family member as 50/50 partners? Would my Capital Contributions equal $60K and the other member's Capital Contributions equal $0 (since technically it was bought using my money)? Or would both of our Capital Contributions be $60K since we would both own the rights to the same property (with $60K equity)?

Also, would a CPA be more suited to answer this question rather than a real estate attorney? Any insight would be appreciated. Thanks.

David M. · Answer

@Mark Andrews

Yeah, probably better to have a CPA answer this...  Your asset, liability, equity balance sheet would take everything into account...

For example, the mortgage is still liability to whomever took out the loan.  However, now it may be the LLC's asset.

Purchasing personally, then quit claim deeding could also be problematic even though its done often --- just because its done doesn't make it right...  The mortgage will still be in the person's name, but the deed is in the LLC's name.  So, without co-mingling funds or using the LLC as an alter-ego, how do you make the payments on the mortgage?  Not impossible, but gets sticky to making sure you maintain the LLC's corporate veil.

Good luck.

Kory Reynolds · Answer

I'll speak purely to the accounting and tax side of it, others can address the legal issues as they have already started probing.

The answer will change depending on whether you are seeking to create tax basis financial statements, or "book" basis financials that track each member's economic interest in the LLC.  Note that for a partnership (your scenario 2), you technically need to be tracking both.

Your adjustment to record the capital contribution in both cases would be to put the gross asset and liability on the financials, with the net to your capital.  If you are making tax basis financials this would contributing the net adjusted tax basis of the property (gross cost and accumulated depreciation), rather than the current economic value.  In your example above, from a straight accounting journal entry perspective, the book financials would be below.  For tax basis it would look similar, but you would bring on the asset and accumulated depreciation at their tax basis amount, and the other side to Equity.

Debit: Building $200k

Credit: Loan $140k

Credit: Owner Equity $60k

For scenario 2 - what is your economic deal here? It sounds to me like you are not truly 50/50 members given you are putting in a fair market value of $60, and they are putting in $0.  Their interest sounds more like it should be structured as a profits interest where they only share in the future additional appreciation (above the value of the entity as formed), and 50% of future operating cash flows? IE if it sold tomorrow, and the property hasn't appreciated or cash flowed since yesterday, they would get nothing. In which case their opening equity in this partnership truly is $0, and yours is the same as scenario 1 at $60k of book value.

Or do you intend on this individual sharing in 50% of the $60k equity right off the bat? Typically this is not going to be a tax friendly way to go.

Chris Seveney · Answer

1. Yes a CPA is suited for this.

2. We would not put equity into the ledger. The capital contribution in the LLC would be the amount of cash you placed in the LLC. Whether its one person or five people, capital contribution is the cash amount.

bonus: by deeding into the llc you most likely will have zero asset protection because it was not an arms length transaction.

Michael Plaks · Answer

@Mark Andrews

From a crude pragmatic point of view, keeping proper books for a single-member LLC may not be worth the trouble. You will not need to report your Balance Sheet to the IRS. Proper books may be suggested by your attorney, however, for asset protection reasons.

If you're in a partnership, as in your Scenario 2, it is not a DIY project and should be delegated to an accounting pro.

Ashish Acharya · Answer

Your loan counts but your equity has nothing to do with the tax capital. These get complicated really quickly. You have to talk to your tax advisor.

How to calculate Capital Contributions to an LLC?

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